Weakened purchasing power and high interest rates
Globally, the pressure on demand is caused by weakened purchasing power, a result of high inflation despite measures by the central banks to normalize interest rates after inflation rate hit 8.7 percent in 2022. The IMF predicted an inflation rate at 6.9 percent in 2023 and 5.8 percent in 2024, in line with the tight monetary policy by developed countries, which is expected to continue until at least mid-2024.
To rein in inflation, central banks around the world have responded by raising their benchmark interest rates. One policy with wider ramifications is the policy taken by the US central bank, the Fed. Its so-called “higher for longer” strategy has seen the Fed Fund Rate hit 5.33 percent in October. This has triggered capital outflows from developing countries and put pressure on their exchange rates, due to the mightier US dollar. Even though the Fed has signaled that it will hit pause on rate hikes, confirmation of monetary easing or a reduction in interest rates is not expected within at least the next six months. Without a hint of monetary relaxation by the Fed, it will be difficult for the global economy to immediately rebound, considering how the US still dominates the global economy, in which it generates up to 24 percent of total world GDP.
One of the factors that influences global purchasing power is commodity prices. In 2023, the global inflation rate could decline, in line with the normalization of commodity prices, although not as low as expected. For example, the global price of Brent crude hit US$120 per barrel after the Ukraine war broke out, then fell to its lowest level of US$74.8 in July, but has steadied near US$91, responding to the crisis in the Middle East.
In line with crude prices, coal prices also increased. Australia’s Coal Price was on an upward trend in 2022 and peaked at US$430/mt, but it continued to fall to US$142/mt in October. The same also happened to natural gas prices, which saw a steep decline amid record production, higher-than-average inventories and milder temperatures.
Energy commodity prices in the European market are much higher than in the US. In October, they were still at double digits (US$14.57 per MMBtu, compared to US$2.9 MMBtu in the US. High energy commodity prices in Europe are still the main driver of inflation and a decline in purchasing power as well as economic downturn.
As for mineral and metal prices, although they have decreased, they still remain at a high level, responding to supply and demand factors. Nickel prices remained lower in Q3 compared to the previous quarter, and are predicted to decline further in 2024, by around 10 percent. This is due to the rise in nickel production in Indonesia and the Philippines, the two largest nickel producers. Meanwhile, demand for nickel will continue to increase, spurred by EV battery plants. The gap in supply and demand means that price correction is likely. In general, the decline in mineral and metal commodity prices in 2023 was part of the price normalization process following a spike in 2022.
In regard to global food prices, there has been a downward trend in 2023 for palm oil, wheat and corn. On the other hand, the price of rice has risen throughout the year, peaking in August and September, the highest since the 2007-08 food crisis. The price of rice rose by 18 percent YoY in Q3 due to extreme weather caused by El-Niño, that hit rice-producing countries. As a result, global rice supplies shrank significantly.
The crisis in global rice mar – kets was worsened by export bans in major rice producing countries, including India, which slapped a high export tariff on broken rice and non-basmati white rice. Meanwhile, rice production in Southeast Asian countries, including Indonesia, were severely affected by El-Niño. The mismatch between supply and demand eventually led to a surge in price of rice globally, undermining food security in many rice-importing countries.
Geopolitical strife
The global economic woes in 2023 are compounded by rising geopolitical tensions which generated mounting uncertainty in global markets. The war in Ukraine has shown no signs of abating, let alone coming to a peaceful resolution. NATO’s military assistance to Ukraine has widened the fiscal deficit of its members, especially countries in the EU. As if that’s not bad enough, on October 7 the Palestinian-Israeli war broke out, sparking a major humanitarian crisis in Gaza.
Historically, the outbreak of war or crisis in the Middle East region would result in higher oil prices. In 1973, OPEC members cut oil exports, causing crude price to soar to as high as US$140-157 (up by between 50 to 75 percent). The Gaza war today has driven up the WTI crude price by 4 percent (US$2.5 per barrel, to US$85.3 on October 9, just a few days after the conflict began. If this war continues for much longer, it will cause uncertainty and ratchet up geopolitical tensions, leading to higher crude price and those of other essential commodities.
The geopolitical pressures in 2023 will have an impact on the global economy, both through international trade and international financial channels. Guenette (2022) argues that the impact of war, especially in Ukraine, in the short term would increase financial pressure and risks, lead to humanitarian crises and displacement, as well as increased prices and shortage of food and energy commodities. Meanwhile, over the long term, the war will have an impact on the global economy, such as global trade fragmentation, disruption in supply chains and investment, and might eventually undermine the stability of the post-pandemic recovery. A study by Orhan (2022) found that the Ukraine war resulted in a global GDP decline by more than 1 percent and increase the global inflation by 2.5 percent in the first year alone.
2024 Economic Outlook
Evaluation of 2023 economic performance, both at domestic and global levels, provides a general sense that it will not be easy to realize Indonesia’s economic growth target of 5.2 percent in 2024. Even if the government can achieve this target, achieving economic growth of 5 percent will not be enough to prevent Indonesia from getting stuck in the middle-income trap. Thus, Indonesia’s economic challenges in the future are not only to achieve the targets set in the APBN macro assumptions, but also to ensure that future economic growth meets the minimum requirements to escape the middle-income trap.
A. Indonesia’s Economic Growth
Indonesia’s economic prospects in 2024 will coincide with the general elections, both presidential and legislative. Therefore, discussing the dynamics of the Indonesia’s economy in 2024 cannot be separated from the political situation that will define the year. It is also worth noting that not all businesses will wait out the election results. At least historical data shows that the economy can still grow amid the five-yearly celebration of democracy.
INDEF projects Indonesia’s economic growth in 2024 to be at 4.8 percent, lower than the government’s own target of 5.2 percent. Pressure on the purchasing power of the lower income households, the moderate rate of loan growth affecting the real sector, and the end of the global commodity rally are some of the factors that will weigh down on economic performance in 2024. Additionally, the stimulation from the fiscal side will still be less optimal given the pattern of budget absorption, which tends to drag out until the fourth quarter. (FIGURE-2)